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With the use of equity release surpassing 3 billion in 2017, an increase of 120% since 2016, could equity release really be the solution in helping an estimated 1.7 million mortgage customers pay off their interest-only mortgages? This issue is particularly worrying considering 200,000 of these customers have their loan maturing within 2 years, and many are in their 60s, 70s and above.

With interest only mortgages, the borrower agrees to pay the interest each month but makes no capital repayments. Borrowers are expected to have some sort of repayment vehicle in place, whether that be an investment, lump sum or endowment. However, the shortfalls produced from these vehicles can be attributed to mis-selling, poor performance and in other cases borrowers just simply never setting anything up.

What are the options?

Many could be considering the recently introduced products from mortgage lenders such as Hodge Lifetime, offering lending into retirement; but this will only go so far with affordability assessments still being required along with provable repayment plans and minimum equity requirements. Similarly, lack of pension planning has resulted in small pension pots, declining annual pension income and 1 in 8 retirees in 2018 retiring with no private pension at all! Therefore, with consumers facing retirement with high mortgages; how will they fund these when their income is low and affordability checks are still taking place?

With this lack of pension provision, the alternative is to downsize. However, a recent survey carried out by L&G signified that poor housing and inflated house prices have resulted in over 50% of over 65s stating they would not consider downsizing an option. This poses the question that if they can’t afford to sustain the mortgage and don’t intend to downsize, what other options do they have?

Property prices have increased five-fold in the past 25 years so many people have the majority of their wealth tied up in their homes. It comes as no surprise then that the public want to access this cash without having to downsize

Could Equity Release be the answer?

On one hand, equity release or more specifically lifetime mortgages operate differently to generic mortgages. In most cases, monthly repayments aren’t required (but are an option) and therefore income multiples aren’t taken into account when determining the loan size. Instead, interest is rolled up with the initial borrowing that is calculated based on the age and health of the applicant, and the property value.

Equity release also doesn’t require downsizing. As previously mentioned, the interest is added to the initial borrowing which although increases the debt, does provides peace of mind that you don’t have to move to a smaller or cheaper property. Most lenders include a ‘no negative equity guarantee’ on their lifetime mortgages and this ensures that the roll up of debt does not exceed the property value; but the added interest will eat into the equity and reduce the potential inheritance for the beneficiaries.

However, borrowers may be able to build in an ‘Inheritance Protection’ on a lifetime mortgage which will provide a useful benefit to those wishing to avoid repayments and still provide some inheritance to their beneficiaries. Although the initial lump sum will be reduced, this proves beneficial to those wishing to leave a percentage of the property to their loved ones.

Equity release products are available for the older generation – the minimum age is usually 55 or 60 with big player providers such as Aviva or Legal and General. At the lower end of this age group lender will release approximately 35% of the property value so it’s worth bearing in mind, if your conventional mortgage is operating at a high loan to value ratio (LTV), then equity release may not work for you

What Interest rate can you expect to be charged?

Interest rates on equity release products have always been higher then generic mortgage rates, but the growth in the market has led to intensified competition leading to rates being available under 4% (as at September 2018). Considering no payment is required, this is highly competitive and under most conventional mortgage lenders Standard Variable Rate (SVR). Halifax, for example, are the part of the largest lender in the country and their SVR is currently 4.24%.

Equity release will not be the right option for everyone, but it may be worthy of consideration for many older customers, particularly those on low incomes who face losing their homes if they cannot find a way of paying back their interest-only mortgages.

At PF Financial we have continued to grow and develop our understanding of this ever-growing market. We are graduate members of the Later Life Academy so have an excellent understanding of the requirements of older clients. As independent advisers we will ensure you fully understand all your options relating to equity release, so you can make an informed decision on whether it can help you. Please contact us for a free, no obligation initial discussion.

If you usually have a reasonable amount of cash sitting in a savings account earning a low interest rate but have an outstanding mortgage balance, then an Offset mortgage could be right for you! An Offset mortgage links your mortgage account to a savings account and offsets – hence the name- the balance of one against the other. For example, if you have a £300,000 mortgage and generally around £70,000 in savings, you would only pay mortgage interest on the net debt, so £230,000.

So why would you do this? Some people would argue you should just make a lump sum payment of the mortgage and granted, this is an option. The problem is, you would lose access to your savings which you may require either for a future plan or just to provide security. Whatever the reason, an Offset means you retain that access and are able to make use of your savings.

Flexibility is a key benefit to the Offset. As well as being able to withdraw and deposit funds if and when required, it gives you peace of mind that should you need emergency funds relatively fast, you have total access to your savings without any penalty.

Moreover, Offset mortgages can also be utilised as an efficient way of making tax savings. Even with the new introduction of the savings allowance, interest earned on savings accounts with higher balances is still taxed; however, by offsetting you effectively remove all tax implications. In most instances, the interest you are charged on your mortgage will be higher then what you can earn in a normal savings account. Therefore, you will be better off as you would be making a tax-free saving at the higher mortgage rate. In addition, for higher rate taxpayers, it works especially well, as the savings made on the mortgage will not be tax deductible.

Why doesn’t everyone do it then? Well, a slight drawback of an Offset is that the mortgage interest rate can be slightly higher than some mainstream products. Therefore, if you don’t have much savings to put in the offset, it might not be the most cost-effective use of your money. However, for those with a decent sum of money in savings who want to retain access to it, I would suggest optimising an offset facility if you have 20% of more of the mortgage balance in savings.

If you are think an Offset mortgage might be right for you, it is important to contact a broker who can talk you through all your options and ensure you find the best possible deal. Give us a call on 01494 778899, email us at info@pffinancial.co.uk or use the link below to get in touch.

Unsurprisingly, one of the questions we’ve been asked the most over the last few months is

‘What will happen to mortgage rates post-Brexit?

Like everyone else, we can’t give definitive answers, but we can give you an idea of what we think is likely based on our years of experience as mortgage brokers and analysing the housing market.

Remember though, that everyone’s circumstances are different, so if you want a free chat about your own personal situation, just give us a call or chat online.

Interest rates: Will they rise?

Last November was a bit of a shock for many homeowners when interest rates rose for the first time in a decade. Well, we may all be in for a shock again. Just last month, Mark Carney, Governor of the Bank of England said that an interest rate rise is ‘likely’ this year, but any increases will be gradual. Many experts believe that there will be a 0.25% rate rise later this month, although Carney has said it’s by no means a foregone conclusion. Watch this space.

So, what does this mean for mortgage rates?

Mortgage rates are now at the lowest we have ever seen them, with some deals below 1%. Given interest rates could be on the rise, now would be a good time to fix your rates and lock in your monthly repayments. Some 5 year deals are extremely low, so it would probably be worth taking advantage of them to avoid any future rate rises from Brexit. We don’t know for sure if mortgage rates will go up, but if you can give yourself peace-of-mind for the next 5 years and you won’t be moving property, why wouldn’t you?

What’s going to happen to house prices? Should I buy or put my plans on hold?

We’ve all heard the horror stories of buyers pulling out because they are worried about the “Brexit Effect”, but have they got the right idea? We’re not so sure.

While it’s true that the annual rate of house price growth is at its lowest level for almost five years [Halifax], and house prices in London have fallen by as much as 15% over the past year [Your Move], other areas of the country, especially the North West are flourishing. And even though house prices across Buckinghamshire, Hertfordshire, Berkshire and Bedfordshire are experiencing some of the slowest growth in the country, experts believe that prices won’t go down, but will either stop going up in 2018, or go up by no more than 1%.

For most homeowners, house prices are relevant to each other so if the one you are selling loses a little of its value, so has the one you are buying. Falling prices may have more of an effect on first-time buyers than any other purchaser and they could be in danger of losing money if prices fall. But we think buying your own home is more of a lifestyle choice than an investment choice so, if you want or need to buy, then we suggest you should. In fact, the way house price growth has slowed, could work in your favour as it might make sellers more willing to accept offers well under the asking price. The good news for first-time buyers is that currently, if you buy a property for £300,000 or less, you won’t have to pay any stamp duty.

Brexit has been a bit of a shock for many and nobody can be 100% of its impact on the housing market and mortgage rates. If you would like to talk through your own personal situation, to get a clearer idea of how it might affect you, please give us a call. Most of our clients come from across the Northern Home Counties of Buckinghamshire, Hertfordshire, Bedfordshire and Berkshire but if you live further afield we are also more than happy to help.

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RISKS WARNING

Mortgage - Your home may be repossessed if you do not keep up repayments on your mortgage

Equity Release - To understand the features and risks on an Equity Release product, ask for a personalised illustration

Financial Planning - The value of investments and income from them can fluctuate, and investors might not get back the full amount invested. Past performance is not a guide to future performance. Equity based investments do not afford the same capital security that is afforded with a deposit account.

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